The opinion of the court was delivered by: ROSENBERG
This action by the plaintiff, Martin J. Whitman, for various equitable remedies, comes as a sequel to that at Civil Action No. 82-28, in which the plaintiff brought an action against the Cyprus Corporation and other defendants, and particularly the principal director of that corporation, Willard F. Rockwell, Jr. In the instant action the defendants are: J. B. Fuqua, a previous director of the corporation and the person who sold substantial blocks of stock to the interest in the corporation controlled by Rockwell; Joseph P. Kazickas, a current director representing the common stock interests and member of the Executive Committee; Robert Redfearn, a previous director of Cyprus; Rockwell, Chairman of the Board of Directors and the other member of the Executive Committee, Don N. Stitt, the president of the company and Cyprus Corporation, itself.
The first action dealt principally with proxy notice. The charge by the plaintiff was that the stockholders were not being properly informed as to potential conflicts of interest among the defendants' slate of candidates, and that the proxy solicitation of the Rockwell group was in part false and misleading. At conferences with this court, the defendants agreed to and did send sufficient notice by a supplemental proxy; and to accommodate this, the court postponed the meeting scheduled for January 19, 1982 to March 12.
On March 16th, the inspectors of the election announced the results of the election. The 4 directors proposed by the plaintiff Whitman to represent the preferred stockholders were elected with 4 directors for the common stockholders proposed by the Rockwell group.
On March 17th, the Chairman of the Board, Rockwell, instructed the president, Don Stitt, to call an immediate meeting of the old directors at Fort Lauderdale, Florida,
without indicating any purpose for the call, as far as the record shows.
On March 19th, the inspectors of the election certified the results, which they had previously announced on March 16th, and on that date, the meeting which Rockwell had instructed to be called, was held by the old directors at 1:00 p.m. in Fort Lauderdale. At that meeting specific action was taken according to the minutes and testimony of witnesses:
1. Reconfirmed the appointment of Rockwell and Kazickas as the members of the Executive Committee, and appointed alternate members in the event of death, resignation, disability, or disqualification;
2. Reconfirmed the appointment of Kazickas to the Audit Committee along with a member of the preferred directors;
3. Appointed a Secretary, Assistant Secretary, Treasurer, and Assistant Treasurer;
4. Approved the acquisition of operating companies by Cyprus Corporation through a subsidiary, Pittsburgh Cyprus Corporation and appointed Rockwell, Stitt and Wick as officers of this subsidiary. The financing arrangements for these acquisitions required only approval from the Executive Committee; and
5. Approved the employment contracts of President Stitt and Vice President Wick, and fixed their salaries.
Other corporate actions were taken but the pertinent and significant actions in corporate fashion were those here particularly enumerated.
The complaint for the instant action was filed March 29th, after the plaintiff learned of the Fort Lauderdale meeting, and on June 18th, the plaintiff filed a supplemental complaint. The defendants filed answers and denied the averments of the plaintiff and that the circumstances required any judicial remedy. The plaintiff, inter alia, charged that the sum of $100,000 was being spent without appropriate Board action on a contract with Drexel Burnham Lambert, and that there was the possible liability or expenditure of a much larger sum in the future; that this was uncalled for; and that it was brought about in part by the influence which may have occurred by reason of the fact that one of the counsel for Drexel was also defense counsel for Cyprus. The plaintiff sought by motion to have this mutual counsel disqualified. At this time I took notice of the circumstances but denied the motion and held it in abeyance in order to permit the plaintiff to raise it at any time in the future.
These questions raise highly critical issues, which this court must in good conscience first determine to provide such equitable remedies as may be required for the stockholders of 32 million shares of common and preferred stock. Thus, I look at not the elected directors' personal or financial interests alone, but facts to be aware of in order to protect the financial interests of those unseen owners of stock who are not present in the courtroom before me.
To make these determinations it is imperative that I make certain findings of fact from the record and from the evidence presented before me at the hearings on July 26-28, 1982, and from the stipulation filed by the parties on August 16, and also from my observations and inferences drawn from all the evidence presented in the case and circumstances before me.
Donald Stitt is president of Cyprus as he had been previously appointed and reconfirmed or re-appointed at the Fort Lauderdale meeting, and he resides in and maintains a business office within the Western District of Pennsylvania. Rockwell with his partisan associates acquired power and control in various ways. He became the majority stockholder by a single purchase of stock in September, 1981. They purchased the controlling interest of approximately 17% of outstanding common stock for approximately $4,300,000. Thereupon Rockwell was appointed a member of the Board of Directors with the understanding that Fuqua, the seller, would additionally appoint whomever Rockwell wanted (Exhibits 11 and 52). Rockwell also resides in and maintains a business office within the Western District of Pennsylvania.
The Cyprus Corporation was and is now a non-diversified close-end investment company
registered under the Investment Company Act of 1940, and maintains its principal management offices at Two Chatham Center, Pittsburgh, Pennsylvania. It deals primarily with investments in stocks, bonds and other financial instruments. These are principally conservative, highly-liquid investments which provide steady income without speculation or great risk of loss.
Articles 3 and 4 by which the Rockwell group proposed to amend the constitution, would have converted the character of the corporation into one which would have permitted its officers to become more speculative and to invest in less secure commodities than theretofore with greater risk of loss.
The argument by the defendants regarding the future of the corporation was that there would be a greater chance of profit with the amount of risk which would be involved in more speculative acquisition operations and thus there would be an increase in the value of all stock. This, the plaintiff contended, would create greater value for the owners of common shares of stock, but it would involve greater risk for the preferred stockholders, and any such actions would need to be closely scrutinized by the preferred directors.
At the time of the hearing before me, the value of common stock on the open market was $3/8 and the value of preferred was $12.25.
The defendants have asserted that the corporation's post-election investment strategy has continued to be conservative at least during the time of this proceeding.
In the instant complaint and the supplemental filing, the plaintiff charges that:
The defendants determined by means of an unlawful plan to subvert the court's order providing for an election and undo the election, itself;